Key business challenges ahead in 2013

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The beginning of a New Year is the time for football, parades, resolutions – and predictions for the coming year. As a teacher, observer and researcher in business, and benefiting from my association with Chapman University and our economic forecast group, here are my predictions for 2013:

The United States will experience economic growth of between 0.25 percent and 1.5 percent. We have finished the presidential election, and uncertainty is somewhat reduced. As a result, the economy may grow but at rates that are historically low because of taxation and regulatory intentions in Washington and Sacramento.

Overall salaries will drop slightly, but total compensation packages will stay about even. Employers will discontinue annual raises or, at the least, reduce the growth in salaries and shift toward a greater contribution to medical insurance coverage, which will certainly rise. New employees will be hired at lower nominal salaries but with employers paying a higher portion of employees' insurance costs.

National unemployment will be stuck at historically high levels, perhaps even rise to and persist at 9 percent. The cost of hiring new employees, driven by ever-increasing regulation, accelerating benefits costs, and employee-favoring labor law, will cause employers to hire later rather than sooner, hire more independent contractors than employees and outsource more of their work.

Entrepreneurship and innovation will be less general and more focused. Because of the high costs, in terms of regulation and taxation of forming a business, formation of new businesses will slow down, and those formed are more likely to be formed by veteran entrepreneurs than first-timers.

New businesses will find less venture capital available at early stages. Venture capital funds will find their tolerance for risk reduced by growing regulation and higher tax rates, and thus will reserve their funding until the new venture seems more likely to succeed. As a result, initial-stage funding for entrepreneurs will more likely be through angel investors and through organic growth, meaning the firm will need to grow slowly through self-generated revenues, rather than investors or lenders.

Cash-rich publicly held firms will be forced to reduce their cash positions. Uncertainty in regulation and taxation has led many firms to hold cash on their balance sheets. (Apple, for example, is holding $11 billion in cash on its balance sheet). A combination of investor pressure and Obama preaching will cause these firms to either buy up smaller firms or dividend excess cash back to their stockholders. Look for the Obama administration to apply pressure, perhaps even an “excess-cash tax,” here.

“Green” will return with shocking results for consumer prices and economic growth. The election is over, so now look for the environmentalist agenda to be fully enacted. Federal and state regulation, professing concern for the environment, will generate huge revenue from licensing and cap-and-trade markets for greenhouse gases. However, the cost of complying with the new green regulations will narrow profit margins, causing firms to choose some combination of higher prices, lower wages and lower returns on investment.

The natural gas and oil “fracking” booms will be strangled by Washington, raising energy prices. Greater regulatory burdens and lower investment tax credits will destroy a promising industry, helping a few environmentalists feel accomplished while the rest of the nation suffers from high energy prices and the resulting slower economic growth.

In order to shore up Social Security and Obamacare, the federal government will find a way to seize the pension funds of states and local municipalities. Social Security cannot survive as is, and Democrats in Congress and the White House will not reduce the growth of both recipients and benefits (that's how votes are purchased). Look for the federal government to declare itself the “steward” of state and local pension funds whose outlays are projected to exceed inflows. Think of CalPERS and CalSTRS assets being grabbed to shore up Social Security.

Unions will be increasingly protected by federal law, making labor markets more inflexible. Another contributor to high and persistent unemployment rates will be the increased power the administration will grant to unions, as huge supporters of the Democratic Party. Increased unionization makes the use of human labor more problematic, thus more machinery and outsourced labor will be substituted for domestic labor (American jobs.)

Inflation will return. The Federal Reserve has done all it can to encourage investment, but interest rates cannot go below zero. The stimulus failed to do anything but re-elect a president and increase national debt. Increased tax revenue will, in the short term only, bring in more revenues, but there will be no reduction in Social Security and unemployment benefits to balance the budget. All that is left is to print currency, whose value will deteriorate as we print money faster than we grow the economy.

Household sizes will rise. High unemployment, growing inflation, and regulatory burdens discouraging new housing construction will combine to encourage underemployed adult children to continue or return to live with their parents.

Most of these predictions are gloomy, but America is still the land of opportunity for those who work hard to learn, accept challenges and work hard at their workplace, and take entrepreneurial risks when they see the opportunity.

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